跨境银行间支付和结算-Jasper项目第四阶段第二份报告-68正式版

CROSS-BORDERINTERBANKPAYMENTSANDSETTLEMENTSEmergingopportunitiesfordigitaltransformationNovember2018LEGALDISCLAIMERThisreporthasbeencompiledandcollatedbyKPMGServicesPte.Ltd(referredtoasKPMGinthisreport)basedoninputsreceivedfromcentralbanksviz.BankofCanada,BankofEngland,MonetaryAuthorityofSingaporeandcommercialbanksviz.HSBC,TDBank,OCBCBankandUOB.Thestatementscontainedwithinthisreportrepresenttheviewsexpressedbytheparticipatingcentralbanksandcommercialbanks.Eachcommercialbankparticipatedinthisinitiativebyprovidinginsightstothekeychallengesinthemarket.Theirparticipationdoesnotconstitutetheirendorsementofthemodelspresented.KPMGServicesPte.Ltdwerenotcommissionedbythecentralbanksinvolvedinwritingthisreportand,assuch,havenotreceivedanypaymentfromthemfortheirroleintheproductionofthisreport.Allintellectualpropertyrightsinorassociatedwiththisreportremainvestedwiththeparticipatingbanksand/ortheirlicensors.Thecontentsofthisreportarenotintendedtobeanyformoflegal,regulatory,orbusinessadvice,andshouldnotbeacteduponassuch.Whilecareandattentionhasbeendeployedinthepreparationofthisreport,theparticipatingcentralbanksandcommercialbanksandKPMGdonotacceptresponsibilityforanyinaccuracyorerrorin,oranyinactionoractiontakenrelyingupontheinformationstatedand/orreferencedinthisreport.Thisreportisprovidedasiswithoutanyrepresentationorwarrantyofanykind.Allrepresentationsorwarrantieswhetherexpressorimpliedbystatute,laworotherwiseareherebydisclaimed.Cross-BorderInterbankPaymentsandSettlements:Emergingopportunitiesfordigitaltransformation|1CONTENTS1.0

Executive

Summary462.0

Background

and

Objectives••2.1Background2.2Objectivesandapproach3.0

Overview

of

Main

Stakeholders:

Key

Roles

and

Challenges9••••3.1Overviewofmainstakeholders3.2Challengesforcentralbanks3.3Challengesforcommercialbanks3.4Challengesforend-users4.0

Key

Challenges

and

Root

Causes16•4.1Currentinitiatives:Acriticalassessment5.0

Potential

Future

State23276.0

Potential

Future

State

Models

for

Cross-Border

Paymentsand

Settlement•6.1Futurestatemodels••••6.1.1Model1:Currentandplannedinitiativeswithinandacrossjurisdictions6.1.2Model2:RTGSoperatorsas“super-correspondents”6.1.3Models3a,3b,and3c:Introduction6.1.4Model3a:W-CBDCsthatcanbeheldandexchangedonlyintheirhomejurisdictionsandnotbeyond•6.1.5Model3b:W-CBDCsthatcanbeheldandexchangedbeyondtheirhomejurisdictions•6.1.6Model3c:Asingle,universalW-CBDCbackedbyabasketofcurrencies••6.2Modelcomparisonagainstrootcausesofpainpoints6.3Modelcomparisonacrossnon-technicalconsiderations7.0

Conclusion

and

Next

Steps8.0

Appendix4750••••••••8.1RTGSRenewalProgramme,BankofEngland8.2ProjectJasper(Canada)8.3ProjectUbin(Singapore)8.4Centralbankliabilities,includingcentralbankdigitalcurrencies8.5Cross-borderpaymentmethods8.6Paymentandsettlementflows8.7Paymentflows–activityview8.8Modeltransactionflows9.0

Acknowledgement10.0

Bibliography596211.0

Glossary66EXECUTIVESUMMARY1.0

Executive

Summaryisthattheseareincrementalchanges,andinthelongertermtheremayneedtobeamorefundamentalparadigmshifttoaddressthesechallengesinamoreholisticway,enabledbynewtechnologyplatforms.Thereport“Cross-BorderInterbankPaymentsandSettlements”isacross-jurisdictionalindustrycollaborationbetweenCanada,SingaporeandtheUnitedKingdomtoexaminetheexistingchallengesandfrictionsthatarisewhenundertakingcross-borderpayments.Thisreportexploresproposalsfornewandmoreefficientmodelsforprocessingcross-bordertransactions.Thereportdiscussesthreepossiblemodelsthatcouldpotentiallyaddresstheissuesidentifiedtoachievethefuture-statecapabilities.Thesemodelsarenotintendedtobeexhaustive,andtheyarepurelyhypotheticalproposalsthatenableananalysisoftherelativemeritsandchallenges.Thefirsttwomodelsarebasedonenhancingexistingdomesticinterbankpaymentsystemswithcurrentortraditionaltechnology.Withoutchangingtheunderlyingcorrespondentbankingmodel,thesetwomodelscouldmeetsome,butnotall,ofthefuture-statecapabilities.TheprojectwasinitiatedbytheBankofCanada(BOC),theBankofEngland(BOE)andtheMonetaryAuthorityofSingapore(MAS)inconsultationfordomainknowledgewithsubjectmatterexpertsfromagroupofcommercialbanksledbyHSBC.OthercommercialbanksinthegroupincludeOversea-ChineseBankingCorporation(OCBCBank),Toronto-DominionBank(TDBank)andUnitedOverseasBank(UOB).KPMGServicesPte.Ltd(KPMG)helpedfacilitateaworkshopbetweentheseparticipantstodiscussviewsonthistopic,andcompiledviewsfromthemtoassistinthedevelopmentofthisreport.GiventheexperiencefromBOCandMASresearchprojects(JasperandUbin,respectively)inexploringtokenizedformsofcentralbankliabilitiesfordomesticusecases,thethirdmodelconsidersthreevariationsbasedonissuingawholesalecentralbankdigitalcurrency(W-CBDC).Thisreportisaimedatdevelopingfurtherinsightsintothechallengesandrootcausesofissuesassociatedwithcross-borderinterbankpaymentsandsettlements.Theseinsightsareusedtoderivedesiredoutcomes,whichwerefertoas“future-statecapabilities.”Apersistentchallengeinaddressingissuesincross-borderpaymentsrelatestocoordinationandperspective.Bybringingtogetherseveralbanksfromdifferentcountriesandthreecentralbanks,thisreportprovidesinsightintotherootcausesinchallengesrelatingtocross-borderpayments,whilebeingagnosticofthecontext,andundertakesanappraisalofthelimitsoftechnologicalinnovation.Thisreportisastartingpointthatenablestheglobalfinancialcommunitytoconductexploratoryprojectstodeepenthecollectiveunderstandingofhowthesemodelscanbeoperationalized—frombothnon-technicalandtechnicalperspectives.Thereportdoesnotprovidespecificrecommendationsforafuture-statemodelforcross-borderpaymentsandsettlements.Instead,itprovidestheoverallframeworkinwhichspecificaspectsofcross-borderpaymentsandsettlementscanbeexploredinmoredepthbyinterestedparties.Thecontentsofthisreportdonotinformthepolicypositionsonaccessofthecontributingcentralbanks,nordotheyrepresentthesupervisoryviewofanyfirmswhichfallwithinthesupervisoryremitofthecentralbanks.Theintentionofthereportisnottopickamodelforthefuture,buttoexplorehypotheticalfuturestates.Thereportnotesthecurrentinitiativesunderwayintheindustrythatgosomewaytoaddressthechallengesidentified.Nevertheless,ourconclusion.BACKGROUNDANDOBJECTIVES2.1

Backgrounddevelopingasafe,efficientandinclusiveinternationalsystemarecompoundedbydivergenceintheregulatoryapproachesofdifferentjurisdictions.Theoverallvalueofcross-borderpaymentsisexpectedtoriseby5.5percentperyearfromUS$22trillionin2016toUS$30trillionin2022acrossbothretailandcorporatepayments.1Newbusinessmodelsandserviceprovidersarestartingtoemergeofferingcross-borderpaymentstoretailmarketsegments.Atthesametime,thenumberofactivecorrespondentbanksgloballyisindecline.Intheperiod2011tomid-2017therewasan8percentdeclineinactivecorrespondentbanksglobally.2Thesecontrastingforces,whichaffectmoneytransfersacrossmarketsgloballyensurethatcross-borderpaymentsareapriorityforbusinesses,commercialbanksandregulatorsalike.Theabilitytoautomaticallyprocessapaymentiscrucialtoensuringthatthecostisreduced.Thisishardertodoifthetransactionmustgothroughmultipleentitiesinmultiplelocations.Ifthesender’sserviceproviderhasnopresenceinthebeneficiary’slocation,andthuscannotreceivethefundsthere,itwillneedtorelyonanotherfinancialinstitution(s)tocompletethetransactiononitsbehalf.4Thisisknownasthe“correspondentbanking”model,whichhasbeenthefoundationofcross-borderpaymentsandsettlementsforcenturies.5Currently,correspondentbankingremainstheonlyubiquitouscross-borderpaymentsolution.Itcanreachanycountryorcurrencyandcanbeusedbyanyonewithabankaccount.However,thenumberoffirmsofferingcorrespondentbankingservicesisindecline.Today,cross-borderpaymentsareexpensive(comparedwithdomesticpayments),cantakemultipledaysandlacktransparency,regardingbothcostsanddeliverytimes.3Thisisprimarilyduetothecomplexityofthecross-borderpaymentandsettlementprocess,whichincludestheinvolvementofmultipleentitiesintheexecutionofacross-bordertransaction,thedegreeofregulation—forexample,anti-moneylaundering(AML),counterterroristfinancing(CTF)andknow-your-customer(KYC)requirements,aswellascapitalrequirements-differencesintechnicalandoperationalstandardsacrossjurisdictions,andtheprevalenceoflegacysystemsandinfrastructure.ThedifficultiesofThegrowingdemandforcross-borderpaymentswarrantsareviewofcurrentpaymentandsettlementprocesses.Byconsideringthedifferinglensesofend-users(thesendersandbeneficiariesofpayments),commercialbanksandcentralbanks,thisreportanalysesthedifferentchallengesfacedbystakeholderstoidentifytheunderlyingrootcausesofthesechallenges.Globalcross-bordertradevolumesareexpectedtowitnesssteadygrowthoverthecomingyears.Cross-borderpaymentswillneedtoevolvetobeabletosupporttheseincreasedvolumesandatthesametimeresolvethecomplexityassociatedwiththecross-borderpaymentsandsettlementprocesstodayCross-BorderInterbankPaymentsandSettlements:Emergingopportunitiesfordigitaltransformation|62.2

Objectives

and

approachThisreportlooksathowhigh-valuecorporatepaymentsareprocessed.Whilesomeofthechallengesfacedinexecutinglow-valuepayments(suchasperson-to-personmigrantremittances)maybecomparable,low-valuepaymentsareoutsidethescopeofthisreport.Thisreportbuildsonthecurrentliteratureavailable,summarisingthekeychallengesfacedbythemainstakeholdersinthecross-borderpaymentsprocessaswellasthekeyfindingsfromtheworkshopdeliberationsanddiscussionsontheproposedmodels.Section3exploresthedifferentparticipantgroupsingreaterdetail,includingtheirperspectivesonthemainchallengesassociatedwithcross-borderpayments.Section4examinesrootcausesofthesechallengesandassessescurrentinitiativesthatseektoaddresskeypainpoints.Section5introducespotentialfuture-statecapabilities,detailinghowtheseproposalsmitigatechallengesidentifiedbyrespectivestakeholders.Section6outlinesthefuture-statemodelswehaveillustratedforconsiderationandcomparestherelativebenefitsacrossthemodels.Thediscussionofthefuture-statemodelsdoesnotrepresentapolicypositionofthecontributingcentralbanksand/orcommercialbanks,butisratheranexplorationofhypotheticalfuturestates.ThereportconcludesinSection7,whichsetsoutpossiblenextstepsforbothtechnicalandpolicyworkseekingtoaddressthesepainpoints.ThisprojectstartedwithaseriesoffocuseddiscussionswithReportContributorgroupswithinparticipatingcommercialbanksinvolvedincross-borderpayments.6Astheleadcommercialbank,HSBCprovidedanin-depthreviewcoordinatingmultiplestakeholdercontributions,whiletheotherparticipatingcommercialbankssponsoredkeyrepresentativeswhoaresubjectmatterexperts(SMEs)indifferentbankingareastoprovideholisticviewsofcross-borderchallenges.Thediscussionscoveredthreekeyareas:current-statepainpoints,potentialfuturestateenablers(future-statecapabilities),andindustryusecasesforcross-borderpaymentsandsettlements.Thefindingsfromthisprocesswerethendiscussedamongthecoreworkinggroup(madeupofcentralbanksandcommercialbanks)atathree-dayworkshopheldintheUnitedKingdomatU-Collaborate™facilities.7Thisreportisdevelopedbasedonexistingliteratureoncross-borderpaymentsandistheoutcomeofacollaborativeeffortbetweencentralbanksandcommercialbanksacrossdifferentjurisdictionsCross-BorderInterbankPaymentsandSettlements:Emergingopportunitiesfordigitaltransformation|7OVERVIEWOFMAINSTAKEHOLDERS:KEYROLESANDCHALLENGES3.1Overviewofmainstakeholderspaymentssectorcompetitionandinnovationwithintheirjurisdictions.Theprocessforenactingacross-borderpaymentinvolvesseveralparties,eachfacingitsownchallenges.RTGSandhigh-valuepaymentsystemsEnd-usersarethebusinessesandindividualswhoneedtosendmoneytoorreceivemoneyfromaforeigncountry.Todothis,theywillusebankingservicesobtainedfromacommercialbank.Thesenderwillprovidethebankwiththedetailsofthebeneficiaryofthepayment.Therearetwocrucial,risk-reducingfeaturestocentralbank-operatedRTGShigh-valuepaymentsystems,thatplacesthemattheheartoftheglobalpaymentssystem.Thefirstisthatsettlementtakesplaceatacentralbank,in“centralbankmoney.”Giventhatcentralbankshavethelowestriskofdefaultofanyagentintheeconomy,thisreducestheriskofsettlementagentfailuretoclosetozero.Ifthecommercialbankhasapresenceinthejurisdictionofthebeneficiary(i.e.,itholdsasettlementaccountwiththerelevantcentralbank),thismaybearelativelystraightforwardtransactionwheremoneyistransferredacrossitsownbooksandthensenttothebeneficiary’sbankviathehigh-valuepaymentsystemoperatedinthatcountry.Thebeneficiary’sbankcanthencreditthefundstoitscustomer,andthepaymentiscomplete.ThesecondfeatureisthemovetoRTGSsystemsthemselves,asopposedtosystemswheresettlementoccursonadeferrednetbasis.Underareal-timesystem,obligationsareextinguishedassoonastheyarise,meaningthatparticipantsarenotbuildingupcreditriskbetweenthemwhileawaitingsettlement.Centralbanksgenerallyadoptedthismodeloverthe1980sand1990sasthetechnologydevelopedtosupportreal-timesettlement.ThemovetoRTGSsystemseffectivelyeliminatessettlementriskfromhigh-valuepaymentsystems.Inmanycases,however,thepaymentmusttravelviaachainofothercommercialbanksthatcreateanetworkbetweendomesticpaymentsystems,i.e.,correspondentbanking.Thishappenswhenthebeneficiarybankdoesnotholdasettlementaccountwiththerelevantcentralbank.Viathischain,apaymentmighttravelacrossmultiplejurisdictionsbeforearrivingatitsdestination.Eachtimethepaymentpassesbetweeninstitutions,itmayormaynotbesettledviahigh-valuepaymentinfrastructureoperatedbyacentralbank.Severalcentralbanksarenowfacingchallengesrelatedtooperatinglegacyinfrastructure.ThishasdriventherecentdecisionsofanumberofcentralbankstorenewtheirRTGSsystems.Oneexampleofalegacyinfrastructurechallengeistheneedforsomesystemstohaveperiodsofdowntimeforend-of-dayorend-of-periodbatchprocessing,therebyrestrictingthepossibilityofhavingoperationsavailable24hoursaday,sevendaysaweek.ThiscanleadtorisksbuildingupviaovernightexposuresTheanalysisbelowthereforefocusesonthechallengesfacedbythesethreekeystakeholders:centralbanks,commercialbanksandend-users.betweenbanksawaitingsettlement,ortoarestrictioninservicesofferedtoend-usersbycommercialbanks.TherestrictedoperatinghoursofRTGSsystemsmeansthereareonlyverysmallwindowsoftimewhenthesystemsacrossdifferentcountriesareopenatthesametime.Asaresult,cross-borderpaymentscangettrappedinacountry,waitingfortherelevantRTGSsystemtoopen,andthereforedrivethetimelagincross-borderpaymentsreachingtheirfinaldestination.3.2ChallengesforcentralbanksCentralbankshaveseveralkeyrolesthatarepertinenttocross-borderpayments.Theyareatthecentreofthesystem,oftenoperatingthereal-timegrosssettlement(RTGS)infrastructureandhigh-valuepaymentschemeswithinwhichinterbankobligationsmusteventuallysettle.Theymayregulateallorsomeofthepaymentschemesthatbanksusetooffercross-borderservices,operateoroverseedomesticRTGSsystemsandensurethattheyarecompliantwiththePrinciplesforFinancialMarketInfrastructures(PFMI),havemandatesforfinancialandmonetarystability,ortakeonrolesasoverseersofeconomicwell-beingorfacilitatorsofPaymentinfrastructuresacrosstheworldwereoftendevelopedtorunonproprietarycommunications,securityanddatastandardsandprotocols.Asaresult,thereisalackofinteroperabilityacrossplatformsandsystems,anddatastandardsdifferCross-BorderInterbankPaymentsandSettlements:Emergingopportunitiesfordigitaltransformation|9acrosspaymentnetworks,whichadverselyaffectscross-borderpaymentprocessingforbanks.Forexample,52percentofthevolumeand25percentofthevalueofhigh-valuepaymentsareformattedtobeISO20022compliant,US-dollarhigh-valuesystemsuseaproprietarystandard;andtheSWIFTcross-bordernetworkusestheMTmessagingformat.8directparticipants,servicingotherbanks,thatmayrepresentsinglepointsofsystemicimportance.However,comparedwithnetworkswithlargenumbersofdirectparticipants,suchtierednetworkscandrivesystem-wideliquidity-savingsbenefits.Thereisanexplicitpolicychoiceforcentralbanksregardingtheregulatorycategoriesoffirmstheyallowtohaveaccesstosettlementaccounts.Broadly,thisisboundedbyriskmitigation,regulationandanunwillingnesstodisintermediatethefinancialsystem.Thispolicychoicealsoextendstoemerging-marketinfrastructuresofthetypedescribedabove.OperationalresilienceisakeyfeatureofRTGSsystems.Incontrast,strategicresilience(theabilityforRTGStoadaptandfacilitateinnovationorchangeinpaymentsmarkets)isnotalwaysinherent.Tooffersettlementservicestonewmarketinfrastructuresleveragingnewtechnologyplatforms,RTGSsystemsmustbeableinteroperatewiththem.ThismaynotalwaysbepossiblewithsomeDifferingtechnicalrequirementscombinedwithvaryingregulatorystandardsacrossjurisdictionspresentabarriertoaninstitutionthatwantstohaveaccesstosettlementaccountsindifferentcountriessimultaneously;itaddscostandcomplexitytotheseoperations.Consequently,fewbankshavethescalerequiredtomaintainaglobalnetworkofsettlementaccountsinmultiplejurisdictions.Thiscanimposefragilitiesontheinternationalfinancialsystemduetotheconcentrationofrisksinasmallnumberoffirmsofferingcorrespondentbankingservices.legacyinfrastructure.Forexample,RTGSinfrastructuremaynotbeabletoincorporatethenecessaryprocessesorproofsrequiredtointeroperatewithsystemsbasedondistributedledgertechnology(DLT).Thiscouldpreventinnovativenewplatformsforconductingpaymentsfromaccessingcentralbanksettlement,withoutwhichtheymightnotreachscale;thatis,thecrucialsettlementrisk-reducingcapacityofRTGSisoutoftheirreach.Access

to

settlement

accountsToaccessRTGSsystems,institutionsmustbeabletoholdsettlementaccountsinthesesystems.9Therangeofeligibleinstitutionsvariesacrossjurisdictions,buteligibilityisgenerallylimited,andthebartoaccesscanbehigh.Inofferingaccounts,operatorsofRTGSsystemsneedtomanageseveraloperationalrisks.Tomanagetheserisks,theymayplacecertainrequirementsontheiraccountholders,suchashavingtherequisiteprocessesandcontrolsinplacetooperatetheiraccounts.Theserequirementscanbeseenbysomesmallerplayersasbarrierstoentry.Additionally,theincreasingthreatofcyber-attacksrequiressophisticateddefencesattheparticipantlevelandmayfurtherraisethecostsofaccess.Paymentnetworksandsystemsinmostjurisdictionsarebasedonproprietarystandardsandprotocols,builtonlegacyinfrastructure.Thisresultsinalackofinteroperabilityacrossnetworksandsystemsandadiminishedabilityofin-countrynetworkstoadaptandfacilitateinnovationThesehightechnicalbarrierstoentryhaveoftenpreventedsmallerpaymentserviceprovidersfromseekingsettlementaccountsandparticipatinginhigh-valuepaymentschemes.Thiscanstifleinnovation,restrictconsumerchoicesandincreaserisk.TheresultinghighlytierednetworkscontainCross-BorderInterbankPaymentsandSettlements:Emergingopportunitiesfordigitaltransformation|103.3Challengesforcommercialbanksincreasinglyfindingthemselvesunderpressurefromnewentrantswhoarenotburdenedwiththeselegacyinfrastructureissues.Nevertheless,certaincostdriversareinherentincross-borderpayments,namely,thosefromFXandfromhighercompliancerequirements.Focusingontheimplicationsofcompliancerequirementscanprovideaninsightintothechallengesfacingcross-borderpaymentserviceproviders.Thecorrespondentbankingmodelhasprovidedaubiquitousmechanismtoenableandsupportcross-borderpayments.However,therearehighcostsforbanksprovidingthisserviceandgrowingpressurefromend-userstotransformtheuserexperience;atthesametime,banksmustalsosatisfymorestringentregulationandsanctionregimesimposedbydomesticandinternationalauthorities.Thisputspressureonthecommercialviabilityofthecorrespondentbankingmodel.Hence,torespondtothesegrowingpressuresandmitigateaccompanyingrisks,bankshavestartedreviewingtheircostdriversandlegacysystems.Aninternationalregulatoryframeworkexistsalongsidedomesticregulationtocombatthefinancingofterrorismandothercross-jurisdictionaleconomiccrimes(e.g.,moneylaundering).Manyjurisdictionshaveadditionaldomesticregulatoryrequirements,whichaddmorecomplexity.Banksacrossthepaymentvaluechainmustcomplywithmultipleregulatoryrequirements,(e.g.,AMLmeasuresandsanctionsscreening)andProfitabilityandcomplexityofcorrespondentbankingassessmentsofcollateralrequirements.Theymustalsocomplywithdifferentpaymentmessageformatsandrequirementsonmessagecontent(includingaroundusingtherightclearingcodes,purposeofpaymentcodes,etc.).Togiveanindicationofthescaleofglobalregulatorychange,arecentreport13byThomsonReuters’regulatoryintelligenceservicesnotesthattheirservicecapturesanalertissuedbyaregulatorybodyonceeverysevenminutes.AlthoughnotallalertswillcorrespondtoA2016McKinseyreportestimatedthattheaveragecostforaUSbanktoexecuteacross-borderpaymentviathecorrespondentbankingnetworkisintherangeofUS$25toUS$35,morethan10timesthecostofanaveragedomesticpayment.10Thecostoftrappedliquidityincorrespondentbankaccountswasestimatedat34percentofthisoverallcost,treasuryoperations(invoicing,claimshandling,disputemanagement)at27percent,foreignexchange(FX)costsatafurther15percent,compliancecostsat13percent,paymentoperations(reconciliation,investigation,repair)at9percentandnetworkmanagementat2percent.11Balancesheetcosts,intheformoftrappedliquidity,arebeingaccentuatedbythepost-financialcrisiscontextoflowinterestratesandexcessliquidity.12However,theyarealsolinkedtotheenvironmentsetbyRTGSoperators.Asdiscussedabove,operatinghourscanbelimitedandthuscanrequirerespondentbankstoplacelargesumsofliquidityinprefundedaccountsascollateral.Restrictiveaccesspoliciesandrequirementsenhancetheneedforsuchcorrespondentbankingrelationships.Finally,bynotbeingopentoorinteroperablewithnewandemergingplatformsforsettlement,RTGSoperatorsmayrestrictinnovationthatcouldchangeliquiditycostsforcorrespondentbanks.Correspondentbankingremainsthemostubiquitousmodelforinterbankpaymentandsettlementglobally.Thecomplexityofthismodelaccompaniedbythedivergenceinregulatorystandardsacrossjurisdictionsaddstotheoverallcosts–explicitandimplicit–Costsarisingfromtreasuryoperations,complianceandpaymentoperationscanbegroupedbroadlyunderoperationalcosts.Asexplainedbelow,asignificantportionoftheoperationalcostsarisesfromlegacyinfrastructureincommercialbanks,whichinturninheritchallengesfromtheRTGSinfrastructurestheyinterfacewith.Banksareassociatedwithcross-borderpaymentsCross-BorderInterbankPaymentsandSettlements:Emergingopportunitiesfordigitaltransformation|11abusinessimpactoradditionalrequirementforpaymentservices,firmsoperatinggloballywillfacecostsintrackingorrespondingtorelevantalerts.Itisestimatedthatfinancialinstitutionsincuranadditionalcostamountingtoabout5percentto10percentoftheirannualturnoverasaresultofregulatorydivergenceacrossjurisdictions.14Costsarisingfromregulationsandinternationalsanctionsregimes,andtheriskassociatedwithnon-compliance,havemadetheprovisionofcorrespondentbankingservicesalessfinanciallyattractivebusinessproposition.bankthatthepaymentflowsthrough,whichcanresultinalengthytimeforapaymenttransfertocomplete.19Furthermore,itincreasesthechancethattherewillbeanerrorintheautomaticprocessingofapayment.Anypaymentmessagesthatrequiremanualinterventionbybankemployeestobeprocessedincurcoststhatareasignificantmagnitudehigherthantheconventional,automatedstraight-throughprocessing.Aseachbankinvolvedinacross-borderpaymenthastheirowninternalguidelinesaroundprocessingpaymenttransactions,thelikelihoodofapaymentrequiringmanualprocessingisafactorofthenumberofbanksinthepaymentchainandthepayment’sultimatedestination.20This,combinedwiththechallengesposedbyRTGSoperatinghoursdiscussedabove,canresultinlongtimelagsforcross-borderpayments.Smallerfinancialinstitutionsaremorelikelytoviewregulatorydivergencecostsasmaterialto